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Consider Use of Renewals and Options

When contract performance has met or exceeded requirements, and the Purchase/SCM Team anticipates a future need, the Purchase/SCM Team should consider renewing the contract or exercising options to ensure a supplier's continued performance. Renewing a contract and exercising an option are not the same thing. Renewing a contract takes place by mutual agreement between the Postal Service and the supplier; exercising an option can be a unilateral action on the part of the Postal Service or through mutual agreement. For a contract to be renewed or an option to be exercised, the contract must include the applicable clauses.

The Purchase/SCM Team should consider the use of renewals and exercise of options for the following reasons:

Preservation of operational continuity

Supplier will have already developed knowledge of product or service

Realization of time efficiency from the Postal Service's perspective, because the activities associated with the Perform Solicitation-Related Activities and Evaluate Proposals tasks of Process Step 2: Evaluate Sources will be avoided

Realization of time efficiency from the potential supplier's perspective, because the learning curve will be reduced

Switching costs and risks will be avoided

Successful contract performance will be more stable

Supplier will be rewarded for successful, high-quality performance levels

Technical support capabilities will have already been established

Option provisions and clauses should not be included in contracts, and should not be exercised, when:

The supplier would be required to incur undue risks (as when the price or availability of necessary materials or labor is not reasonably foreseeable) which endanger performance and lead to unfair prices

An indefinite-quantity or requirements contract is appropriate, except that options for continuing performance may be used

Market prices for the supplies or services involved are likely to change substantially

The option quantities represent known firm requirements for which funds have been budgeted and approved, unless:

- the basic quantity is a learning or testing quantity

- there is some uncertainty as to supplier or equipment performance

- realistic competition for the option quantity is impracticable once the initial contract is awarded

Renewals of mail transportation highway contracts are discussed in the Mail Transportation Purchasing commodity specific practice.


The renewal of a contract is the extension of contract performance by the mutual agreement of the parties for a specific period beyond that of the original contract term. When the Purchase/SCM Team foresees the potential need for such an extension, for example, when there is a continuing need for a service (e.g. cleaning, technical) or an ongoing need for a certain type of supply, renewals should be considered and Clause B-78: Renewal should be included in the contract. If, within a reasonable time before the contract expires (six months, for example), the Purchase/SCM Team decides that an extension is needed, discussions and negotiations should be opened with the supplier to determine whether both parties can agree upon the renewal. During these discussions, the scope of the original contract should not be significantly changed; if the Postal Service's needs have changed, a new contract should be solicited. The renewal price must be negotiated and adjusted as necessary during the discussions to reflect current market pricing. If the parties agree upon the renewal, the contract is modified to reflect the new agreement. The term of any renewal may not exceed four (4) years, and no contract may be renewed more than once.

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The exercise of an option is the Postal Service's decision to use the clauses present in the current contract to continue the supplier's performance. Options allow the Purchase/SCM Team to purchase additional amounts of items or services than those required initially or to extend contract performance past the original period. Options are either priced or unpriced at the time of contract award. If they are unpriced, price must be agreed to via discussions and negotiations before the option can be exercised.

Consideration of Options

Options need not be evaluated to award a contract when:

The option would have no effect on the outcome of the evaluation (when the option quantity must be offered at the same price as the basic quantity, the option is for a time extension only, or the option is unpriced); or

When there is a reasonable certainty that funds will not be available to exercise the option

When options will not be evaluated, the contract file must contain the rationale for the decision. When the Purchase/SCM Team decides before issuing the solicitation that options will not be evaluated, the solicitation must include Provision 2-4: Evaluation Exclusive of Options, or Provision 2-5: Evaluation Exclusive of Unpriced Options. In all other cases, the Purchase/SCM Team must follow the instructions in paragraph b of Provision 4-2: Evaluation, or include Provision 2-3: Evaluation of Options, in the request for proposals (RFP).

Options in Solicitation-Related and Contractual Documents

Option clauses may be included in contracts when increased requirements are foreseeable during the contract period or when continuing performance past the original period is in the best interest of the Postal Service. Option clauses may require that additional quantities be priced the same as the basic quantities or at a different price. The clauses may also allow for unpriced options at the time of award. The price for these options is subject to discussions and negotiations when the option is exercised. Priced options may require suppliers to guarantee prices for definite time periods, with no guarantee that the option will be exercised. Their improper use may result in unfair prices to the Postal Service or an unfair financial burden on the Supplier. When additional requirements are foreseeable and subsequent competition would be impracticable because of factors such as production lead time and delivery requirements, the use of priced options may be preferable to negotiating a price later when the Supplier is the only practicable source. Contracts containing priced options that exceed five years must include an economic price adjustment clause (such as 2-28: Economic Price Adjustment Labor and Materials or 2-29: Economic Price Adjustment Index Method).

The contract must limit the additional quantities of supplies or services that may be purchased or the duration of the period for which performance of the contract may be extended under the option, and it must fix the period within which the option may be exercised. This period should be set to give the Supplier adequate notice for performance under the option. In fixing the period, consider the lead time needed to ensure continuous production and the time required for additional funding and other approvals. The period for exercising the option should always be kept to a minimum. When a solicitation contains an option for additional quantities of supplies at prices no higher than those for the initial quantities, care should be taken to ensure that the option quantities are reasonable and do not cause the Supplier financial hardship. The quantities or the period under option and the period during which the option may be exercised must be justified and documented in the contract file by the Contracting Officer.

The solicitation may allow varying prices to be offered for the option quantities, depending on the quantities actually ordered and the dates when ordered. If so, the solicitation must specify the price at which the options will be evaluated (e.g., highest option price offered or option price for specified quantities or dates).

An option for increased quantities may be expressed as a percentage of specific line items, a number of additional units of specific line items, or additional numbered line items (identified as the option quantity) with the same name as the items initially included in the contract. An option for increased services (including construction) may similarly be expressed in terms of percentages, increases in specific line items, or additional numbered line items expressed in the units of work initially used in the contract (e.g., labor hours, square feet, or pounds or tons handled). When exercising the option would result in extending the duration of the contract, the option may be expressed in terms of an extended completion date or an additional time period.

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Other Topics Considered

Perform Switching-Cost Analysis topic, Develop Sourcing Strategy task, Process Step 2: Evaluate Sources

Evaluate Contract Effectiveness topic, Manage Delivery and Contract Performance task, Process Step 5: Measure and Manage Supply

Decide to Renew a Contract or Exercise Options topic, Manage Delivery and Contract Performance task, Process Step 5: Measure and Manage Supply

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